Nokia says telecoms gear market tough, but outpacing Ericsson

Reuters

By Eric Auchard and Jussi Rosendahl

Photo:

By Eric Auchard and Jussi Rosendahl

BARCELONA/HELSINKI (Reuters) - Nokia <NOKIA.HE> said on Tuesday it was outperforming arch-rival Ericsson <ERICb.ST> in a weak telecoms equipment market, but its shares fell as its dividend plans and profitability forecasts missed analysts' expectations.

Telecoms network suppliers are struggling after demand for 4G mobile broadband equipment peaked last year, with upgrades to next-generation 5G equipment still years away.

Nokia, which bought rival Alcatel-Lucent this year in a bid to cope, forecast at an investor meeting in Barcelona that its network equipment sales were likely to fall around 2 percent next year, in line with the broader market, and return to modest growth in 2018.

It also predicted demand for network equipment among telecoms operators would grow on a compound annual basis by just 1.2 percent from 2016-2021.

The Finnish company said the market was the toughest it had been for years but that it was faring better than bigger rival Ericsson, which in recent months has issued a dramatic profit warning and replaced its chief executive.

"Nokia is not Ericsson. They are in crisis. We outperformed them in every area," Chief Executive Rajeev Suri said.

With growth expected to be subdued through the end of the decade, Nokia is looking to keep investors on board with tight cost control, investments in new technology and returns to shareholders.

Some analysts, however, were disappointed by Nokia's dividend and profitability targets, and its shares fell as much as 7.7 percent to a three-year low of 3.658 euros.

"People were hoping for better," Societe Generale analyst Alexander Peterc said, noting Nokia had pared back share buybacks and planned to increase its dividend only modestly.

"All these measures point to a company being highly focused on cash-conservation," he said. Peterc recently joined SocGen and has no formal rating on Nokia shares.

Network equipment firms are also trying to entice investors with visions of future growth from 5G networks, which could start as early as 2018 but are only expected to go mainstream after 2020. Ericsson, Nokia and China's Huawei [HWT.UL] account for 90 percent of mobile network gear sales, but face growing competition from other network and software players.

Ericsson released a new market forecast on Tuesday, predicting global mobile phone subscriptions would nearly double to 6.8 billion six years out, from 3.9 billion this year.

It said it now expected 5G mobile subscribers to reach 550 million by 2022, three-and-a-half times higher than its previous estimate of 150 million forecast for 2021.

TOUGH TIMES

Nokia said cost cuts would help to boost its network unit's operating margin to 8-10 percent in 2017 from an estimated 7-9 percent in 2016, and to 10-15 percent in the long-term. It also said it planned a dividend of 0.17 euros per share for 2016.

Analysts polled by Reuters last month had expected a 2017 margin of 10.5 percent and a dividend of 0.20 euros.

Buying Franco-American Alcatel-Lucent expanded Nokia's business in fixed-line telecoms equipment and optical networks, which some analysts say has helped it to outperform Ericsson.

But Nokia on Tuesday lifted its estimate for restructuring charges from Alcatel's integration by 500 million euros to about 1.7 billion euros. It is axing thousands of jobs as it seeks to cut 1.2 billion euros of annual costs by 2018.

Setting out its forecasts, Nokia said it expected the network equipment market to decline in Europe, China and Latin America next year, while remaining flat in North America, Middle East, Africa and Asia, outside of China.

"The mobile network market is (in) the toughest shape it has been in my lifetime," Chief Financial Officer Timo Ihamuotila told investors.

Nokia forecast the network gear market would return to modest growth in 2018 fueled by a rebound in several regions, although demand would remain flat in Europe and fall over the next five years in Greater China.

It said upside to its forecasts could come from new customers beyond telecoms operators, including big Internet players, automakers and industrial Internet companies. In the near term, it also sees fresh growth from equipping police and other emergency services with new 4G voice and video equipment.

Once known for its mobile phones, Nokia sold the handset business to Microsoft <MSFT.O> in 2014, leaving it with the networks business and a portfolio of technology patents.